5 key pension facts you need to know if you’re self-employed
If you’re self-employed, you’re arguably more in control of your career and financial future. You’re fully responsible for setting aside the wealth you’ll need to achieve your dream lifestyle in retirement.
Though, when it comes to pensions, managing your retirement savings could seem more complex. A survey reported by PensionsAge worryingly found that 41% of self-employed people aren’t currently paying into a personal pension, which could significantly affect their financial stability later in life.
You may well not pay into a pension if you don’t know about the value of doing so, and how creating a retirement pot could be beneficial for you, both now and in future.
So, if you feel as though your pension knowledge could do with a refresher, continue reading to discover five facts you need to know as a self-employed person to ensure that your retirement plans are on track.
1. You can either invest by yourself or through a provider
If you’re self-employed, you almost certainly won’t have a workplace pension opened on your behalf by an employer. Instead, you’ll need to start your own personal pension.
A personal pension is a type of defined contribution (DC) pot that allows you to set up and contribute to your own retirement pot. In this type of fund, the value when you come to draw on it is determined by how much you pay in over the course of your career.
With these types of pensions, your contributions are typically invested on your behalf by a provider. The fund managers will usually aim to invest in a range of asset classes, such as:
- Company shares
- Bonds and gilts
- Commodities
One of the advantages of this is that you don’t have to worry about researching, finding, and then investing in different securities to achieve adequate diversification, as the provider will do this for you. Any returns generated are then free from tax.
Alternatively, if you’d prefer having more flexibility over how your money is invested, it might be worth considering a self-invested personal pension (SIPP).
As the name implies, a SIPP – which enjoys the same tax benefits as other forms of pensions – gives you the power to choose your own investments. This means you can build a portfolio that meets your exact needs and lifestyle goals.
Just remember that it can be complex to administer your own pension investments. If you’re especially busy with work, you might not have the time to manage this.
Meanwhile, working with a professional could be beneficial. I can examine your personal circumstances and help you determine which form of pension would best suit your goals for the future.
2. It’s worth contributing to your pension as early as possible
You may believe that, as you progress through your career, your earnings will rise over time, making it easier to contribute to your pension later in life. So, you might delay starting a pension until later.
Though, while it is never too late, generally the earlier you start saving towards retirement, the better. Nest gives a fitting example of this.
Imagine two people contribute £200 a month to their pensions over 10 years, totalling contributions of £24,000 each. “Person One” contributes between the ages of 22 and 32, while “Person Two” does so from 32 to 42.
Assuming each person generates annual growth of 5% until the age of 60 (net of any charges), Person One would end up with almost £125,000, while Person Two’s fund would only reach around £77,000.
This is because starting earlier allowed Person One to benefit more from the snowballing effect of compound growth over time – that is, growth on the growth your funds already generated, and so on.
Of course, you might only be considering planning now that you’re later into your career. Even so, it’s still possible to catch up.
I can use sophisticated cashflow modelling software to help you understand what you would need to save in your pot to live your ideal lifestyle, and identify any shortfalls. From here, I could help you explore ways to make up for this, such as increasing your contributions or identifying additional areas for saving.
3. There are tax benefits to contributing to your pension
Alongside tax-free returns on your investments, one of the more significant benefits of contributing to your pension is tax relief, an incentive designed to encourage you to save more into your pot.
Tax relief essentially sees the government “top up” your pension when you contribute. This is applied at your marginal rate of Income Tax, meaning a £100 contribution would only “cost” a basic-rate taxpayer £80. Meanwhile, it would only “cost” higher- or additional-rate taxpayers £60 or £55, respectively.
Basic-rate relief is usually applied automatically. If you are a higher- or additional-rate taxpayer, you must claim this extra relief through your self-assessment tax return.
It’s also worth being aware of the Annual Allowance. This is the maximum amount you can contribute to your pension in a single tax year without incurring an additional tax charge, and includes your contributions, any from a third party, and tax relief.
As of the 2024/25 financial year, the Annual Allowance stands at £60,000, or 100% of your earnings, whichever is lower.
Understanding and navigating these rules can sometimes be challenging, and missing out on tax relief could considerably affect your standard of living during retirement.
I could help ensure that you’re maximising these tax-efficient benefits and keeping your retirement plans on track.
4. It might also be wise to make pension contributions as a business
If you’re self-employed and run a limited company, you might even be able to make employer contributions to your own pension, allowing you to contribute directly from your business profits.
Indeed, AJ Bell reveals that these contributions can be deducted from your taxable profits, which could reduce the Corporation Tax liability on your business.
Moreover, unlike salary payments, employer pension contributions typically aren’t subject to National Insurance (NI).
Following the recent Budget in October 2024, the NI rate for employers has increased from 13.8% to 15%, with the threshold dropping from £9,100 to £5,100 from April 2025.
This change could affect how you plan for your retirement, and employer pension contributions could become even more beneficial for tax efficiency.
Since employer contributions usually aren’t subject to your personal Income Tax or NI, or Corporation Tax and NI for your business, this approach could be an effective way to build your retirement savings.
Just remember that your employer contributions still count towards your Annual Allowance.
The rules surrounding pension contributions can be complicated, so working with a financial planner could help you make informed choices that suit both your personal and business plans.
5. You have relative flexibility in how you access your pot
When you retire after a lifetime of working and saving, you’re likely looking forward to finally accessing your pension wealth.
Once you reach the age of 55 (rising to 57 in 2028), you can generally do so in several ways.
Take it as a lump sum
- You can typically take the first 25% of your pension as a tax-free lump sum, which could help you pay for any considerable one-off expenses.
- Further lump sums are subject to Income Tax. So, taking a large lump sum could inadvertently push you into a higher tax band and you may end up paying more Income Tax.
Use flexi-access drawdown
- Flexi-access drawdown allows you to control how and when you draw an income from your pension depending on your needs.
- Just note that it’s worth considering factors such as life expectancy and inflation, otherwise you may end up drawing too much from your pension and risk your future financial security.
Purchase an annuity
- You could also exchange a portion – or all – of your retirement savings for an annuity, which offers a regular and guaranteed income for a set period of time, or life, depending on the type you choose.
- While this does mean you don’t have to deal with the responsibility of managing your pension, annuities tend to be far less flexible than other options.
It’s worth remembering that you don’t have to choose a single way to access your pension – you could mix and match depending on your circumstances.
I could assess your situation and help you figure out which method of drawing from your pension best suits your needs.
Get in touch
If you’re self-employed and have questions regarding your pension, then I would be more than happy to offer you the support you need.
Email Marnel.Stafford@fosterdenovo.com or call 07305 970959 or 0207 469 2800 to find out more about how I can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate cashflow planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.